On Aug. 22 the Financial Accounting Standards Board issued a proposal, Consolidation (Topic 810), Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements.

The proposal would permit only private companies, meeting certain criteria to be exempt from applying variable interest entity (VIE) guidance to lessor companies under common control.

The exception only applies when the private company and the lessor entity are under common control and substantially all activities between the two entities consist in leasing or in support of leasing. The proposal provides that companies opting for this would have to disclose the leasing arrangement’s key terms; the amount and key terms of any debt or liabilities related to the lessor entity; and the key terms of explicit interest related to the lessor entity. 

If approved, this would make it easier for private company lessees to enter into off- balance sheet leasing arrangements with affiliates.  The guidance would not apply to public business entities, not-for profit entities or employee benefit plans although among the questions included for comment is whether the board should also consider them in the final rule.

Comments are due on the FASB/IASB controversial joint leasing proposal by Sept. 13.

 In comments Sept. 9 at the Ernst &Young International Financial Reporting Standards (IFRS) Congress, Berlin, Hans Hoogervorst, Chairman of the International Accounting Standards Board said that because the vast majority of lease contracts are not recorded on the balance sheet, “it has been estimated that the hidden leverage in leases leads to an underestimation of long-term debt by some 20 per cent.”

Hoogersvorst spoke of the need to increase “rigour and comparability” in lease contracts by taking the guesswork out of the equation. “The companies providing the lease financing are more often than not banks or subsidiaries of banks. If this financing were in the form of a loan to purchase an asset, then it would be recorded.  Call it a lease and it simply does not show up in the books.” 

The Chairman of the IASB referred to the boards’ revenue recognition standard expected to be released in the autumn as the “jewel in the crown of convergence with the FASB.”  Its importance rests on the fact that it affects all companies, replacing “American standards that contain thousands of pages of application guidance and IFRS standards that provide too little guidance,” he said.

 In auditing news, the Public Company Accounting Oversight Board released a report Aug. 19 finding deficiencies in all of the firms it inspected last year that audit broker-dealers, as well as lack of compliance with Securities and Exchange Commission rules requiring the auditor to obtain reasonable assurance that any material inadequacies in the accounting system are addressed.

Aug. 28 inspectors at the PCAOB released KPMG LLP and Pricewaterhouse Coopers inspection reports from 2012, finding that both firms were continuing to fall short of PCAOB's auditing standards.

 For both firms the majority of failures consisted in failure to perform audit procedures required by PCAOB Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That is Integrated With an Audit of Financial Statements.

This continues the trend described by PCAOB board member Jeannette Franzel, in Dec. 2012 that the number of audits in which firms failed to obtain sufficient evidence to support their opinions on internal control over financial reporting was high and getting higher.

Both KPMG and PwC have responded in their official responses to Helen Munter, director of the Division of Registrations and Inspections at PCAOB that they have made adjustments to their procedures. PCAOB will have to determine if that is sufficient or take further steps to ensure remediation. In March 2013 the Board unsealed previously private portions of two PwC inspection reports related to audits performed in 2008 and 2009.

Compiled by Laura Tieger-Salisbury, Accounting Policy and Practice Report Copy Editor